HONOR ENGINEERING LTD v. HING FAT MACHINERY & ELECTRICAL ENGINEERING CO LTD

DCCJ3397/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3397 OF 2012

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JUDGMENT

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1. This is the trial of an action by the plaintiff against the defendant where the plaintiff is suing the defendant for the sum of $601,395 in respect of works done in a project known as the Resources Centre of the Construction Industry Council at G/F, CIC Kowloon Bay Training Centre, 44 Tai Yip Street, Kowloon Bay, Hong Kong (“the Project”).

A.  Background and the parties’ respective cases

2. The plaintiff is and was at all material times a company incorporated in Hong Kong carrying on the business as, inter alia, a building services sub-contractor.

3. The defendant is and was at all material times a company incorporated in Hong Kong carrying on the business as a building services sub-contractor. 

4. REC Engineering Company Limited (“REC”), a wholly-owned subsidiary of Yau Lee Holdings Ltd, is and was at all material times the main contractor of the Project. 

5. By an Agreement in writing dated 15 December 2011 and made between REC and the defendant (“the Agreement”), REC sub-contracted certain works of the Project to the defendant for the sum of $1,713,309.  The scope of the sub-contract works comprised the following major items: electrical system, fire service system and mechanical ventilation and air-conditioning system installation works.

6. It is not in dispute that the contract works under the Agreement together with some variation and/or additional works were completed. 

A1  The plaintiff’s case and evidence 

7. The plaintiff’s case is a simple one.  By a purchase order No PO-CIC-050112-1 dated 5 January 2012 (“the PO”) signed by Mr Cheung King Kit (“Mr Cheung”) for and on behalf of the plaintiff and Mr Raymond Ng (“Mr Ng”) for and on behalf of the defendant, the defendant engaged the plaintiff to execute the electrical system and fire service system installation works of the Project for the sum of $646,500 (“the Works”).

8. It is also the plaintiff’s case that in the course of the execution of the Works, it executed and completed various variation and/or additional works as instructed by the defendant from time to time and that the total value of these variation and/or additional works is $354,895, full particulars of which are set out in the variation orders (“VO”) nos 1 to 14 submitted by the plaintiff to the defendant on divers occasions in January and February 2012. 

9. The plaintiff claims that the total value of the Works including the VO is $1,001,395 ($646,500 + $354,895). However, the defendant only paid $400,000.  Therefore, a balance of $601,395 is due and owing by the defendant to the plaintiff.  By an invoice dated 20August 2012, the plaintiff sought payment of the sum of $601,395 from the defendant. 

10. At trial, Mr Cheung, a director of the plaintiff, gave evidence for the plaintiff.  In gist, Mr Cheung’s evidence consists of the following:-

(a) Mr Ng was his old colleague when he worked for Tridant Engineering Limited and later for Kenworth Engineering Limited.  He met Mr Ng again in 2009 in a project known as Grenville House.  Mr Ng was then a senior engineer of REC.

(b) In or about late 2011, Mr Ng told Mr Cheung that he had teamed up with the defendant and had subcontracted various works including the electrical system and fire service system installation works for the Project from REC.  Mr Ng also told Mr Cheung that he was authorised by the defendant to manage the defendant’s works under the Project and was desirous of further subcontracting the electrical system and fire service system installation works of the Project to the plaintiff.  Mr Ng asked Mr Cheung to carry out certain works under the Project on an urgent basis.  He further told Mr Cheung that the plaintiff could contact him for any liaison works.

(c) In anticipation of a contract to be entered into between the parties for the Project, Mr Cheung agreed on behalf of the plaintiff to carry out the works.  In or about November 2011, the plaintiff carried out certain works for the Project.

(d) Shortly after the plaintiff’s commencement of the Works, Mr Cheung told Mr Ng that he wanted to apply for interim payment to finance the purchase of materials and labour for the Works and asked him how the plaintiff could apply for payment.  Mr Ng told Mr Cheung that the plaintiff should invoice the defendant for the plaintiff’s work done in the Project, and all correspondences including the plaintiff’s invoices should be sent to Room 16, 13/F, Block B, Hang Tung Building, 26 Bute Street, Mongkok for both his and his partner one Mr Lai’s attention.  It is not in dispute that this is the residential address of Mr Lai Koon Lun, the sole director of the defendant (“Mr Lai’s residential address”). 

(e) In or about January 2012, Mr Ng gave the PO to Mr Cheung for him to sign.  The contract sum stated in the PO was $646,500.  Mr Cheung signed the PO accordingly.

(f) During the course of the Works, the plaintiff was known as the defendant’s subcontractor by REC and other contractors working at the site.  Mr Cheung also attended on behalf of the defendant site coordination meetings, received instructions from REC and acted on these instructions and attended matters happened on site.

(g) During the course of the Works, the plaintiff was instructed by REC to carry out works which were not covered by the PO but were set out in the VO claims submitted by the plaintiff to the defendant.  By its six letters all dated 31 January 2012, the plaintiff submitted VO claims nos 1 to 6 to the defendant.  On divers dates in February 2012, the plaintiff submitted VO claims nos 7 to 14 to the defendant.  The VO claims were sent by the plaintiff to the defendant at Mr Lai’s residential address.  The defendant in turn submitted its VO claims to REC for assessment.  The VO claims submitted by the defendant to REC are called “Quotations”, stamped with the defendant’s company chop and printed on the defendant’s letterhead with Mr Lai’s residential address stated thereon.  Two summaries of the VO claims submitted by the plaintiff to the defendant and by the defendant to REC are at Annexes 1 and 2 respectively.  As can be seen from the Annexes, the total values of the VO claims submitted by the plaintiff to the defendant and by the defendant to REC are $354,895 and $400,335 respectively.

(h) From time to time the plaintiff issued invoices/interim payment applications to the defendant.  The final invoice/payment application is dated 20August 2012.  In it the original sub-contract sum and the VO claims are stated in the amounts of $646,500 and $354,896 respectively, ie, total amount of $1,001,395.  As the defendant had paid $400,000, the outstanding balance under the final invoice was $601,395. All the invoices/payment applications were sent by the plaintiff to the defendant at Mr Lai’s residential address for the attention of Mr Lai and Mr Ng.

(i) As regards the quantum of the plaintiff’s claim, in or about September 2012, Mr Ng on behalf of the defendant verbally agreed with Mr Cheung on behalf of the plaintiff that the plaintiff should be entitled to the values of the VO claims as assessed by REC and agreed by the defendant less 10% for the defendant’s management fee.

(j) In or about October 2012, Mr C S Choi, an engineer of REC (“Mr Choi”), told Mr Cheung that REC had paid to the defendant over 80% of the contract sum under the PO.  Furthermore, in or about the end of May 2013, Mr Choi told Mr Cheung that REC had assessed the final value of the VO claims as $214,143.04 and that a contra charge of $15,564 for relocation of PABX (public address broadcasting system) would be charged against the defendant.  REC’s assessment on the VO claims and contra charge had been sent to the defendant for its agreement.  As regards the contra charge, the relocation was not caused by the plaintiff’s default nor was it included in the original works under the PO.  The plaintiff is not liable for the said contra charge. Mr Choi told Mr Cheung that as at late May 2013, the defendant had already received about $60,000 for the VO claims completed by the plaintiff under the Project.  Mr Choi further told Mr Cheung that REC had withheld certain sums under the Agreement because of the defendant’s other projects with REC and of which the plaintiff played no part.

A2  The defendant’s case and evidence

11. In the defence, the defendant pleads that it had no knowledge of the PO, that the PO was signed without its authority and did not bind it.  The defendant pleads that there were no director’s resolutions and/or board meetings authorizing the signing of the PO or the making of any sub-contract with the plaintiff.  The defendant further pleads that it had wholly sub-contracted the works under the Agreement to Full Harvest International Limited (“Full Harvest”), that it entrusted all site management and administration functions to Full Harvest and that after it received payments from REC, it would pay 95% of the same to Full Harvest under its sub-contract with Full Harvest.

12. In an answer to a request for further and better particulars of the defence, the defendant pleads that the sub-contract was made between Mr Lai and Ms Ma Ngan Sui (“Ms Ma”) of Full Harvest in a face-to-face meeting in early 2011 under which the following sub-contracting arrangement was agreed:-

(a) If Full Harvest was interested in undertaking works under a certain project, Full Harvest would assist the defendant in preparing a tender for that project;

(b) If the defendant’s tender was accepted, the defendant would wholly sub-contract the works to Full Harvest and entrust all site management and administration functions to Full Harvest; and

(c) Upon receiving payment for the works from the project client, the defendant would pay 95% of the received payments to Full Harvest as sub-contract payments.

13. As to the VO claims, the defendant puts the plaintiff to strict proof that they constituted variation and/or additional works under the PO and that their values were reasonable.

14. At trial, Mr Lai gave evidence for the defendant.  In summary, his evidence is as follows:-

(a) The defendant was incorporated on 24 September 1997.  Since its incorporation, the defendant had been taking jobs as a building services sub-contractor from various main contractors including REC, specializing in electrical and mechanical works.

(b) In about early 2011, he had a meeting with Ms Ma, who was introduced to him by Mr Ng, a long-time acquaintance of his.  During the meeting, the sub-contracting arrangement as set out in paragraph 12 above was agreed. 

(c) In about late 2011, Ms Ma told Mr Lai that she was interested in bidding the job for the Project.  Full Harvest therefore prepared a tender for the defendant to submit to REC.  Apart from attending a tender meeting held at REC’s office for discussion of the tender, Mr Lai had no other involvement during the whole tender process for the Project.

(d) Mr Lai was later informed by REC that the defendant’s tender for the Project had been accepted.  Upon REC’s invitation, Mr Lai attended REC’s office on or about 15 December 2011 and signed the Agreement.

(e) Thereafter, Mr Lai had a meeting with Ms Ma and handed her the original signed Agreement.  The Agreement was handed to Ms Ma because it was Full Harvest who would undertake the sub-contract works and administer the sub-contract.  After that, Mr Lai virtually had no further involvement in the Project.  He never visited the site, attended meetings, or signed letters relating to the Project.  All along, it was Full Harvest who carried out the sub-contract works and administered the sub-contract pursuant to the sub-contracing arrangement between the defendant and Good Harvest.

(f) Mr Lai had never seen the PO before the commencement of this action.  The letterhead of the PO was not the usual letterhead used by him in connection with the defendant’s matters.  On the date of the PO, ie, 5 January 2012, he was the sole director of the defendant and he had not authorised anyone to enter into any sub-contract on behalf of the defendant, whether with the plaintiff or with any other person, nor was he consulted upon any such alleged sub-contract.

(g) Mr Ng was never an employee of the defendant, and had no authority to enter into contracts on behalf of the defendant.

(h) As regards the quantum of the plaintiff’s claim, there was no agreement between the plaintiff and the defendant that the plaintiff should be entitled to the values of the VO claims as assessed by REC and agreed by the defendant less 10% for the defendant’s management fee.

15. It is not in dispute that by letter dated 29 May 2013, REC enclosed therewith a statement of final account for the Project for the defendant’s agreement.  In this statement of final account, REC certified that the original sub-contract sum of $1,713,309 and the VO claims of $214,143.04, less contra charges of $15,564, ie, final sub-contract sum of $1,911,888.04, were due and payable by REC to the defendant.  By another letter dated 15 August 2013, REC enclosed therewith a revised statement of final account for the Project for the defendant’s agreement.  The figures for the original sub-contract sum and the VO claims in this revised final statement of account were the same as those set out in the statement of account enclosed with the letter dated 29 May 2013, but the contra charges were increased to $47,917, resulting in a revised final sub-contract sum of $1,875,535.04.  The defendant was asked to sign the statements of final account in full and final settlement of the Agreement.  The statements of final account disclosed by the defendant in this action have not been signed by the defendant. 

B. The issues

16. As to the issues in this case, I take them from the list of issues filed by the defendant on 7 February 2014:-

(a) Whether the PO was signed with the authority of the defendant and constituted a binding contract between the plaintiff and the defendant?

(b) If the answer to (a) is no, whether the defendant is nevertheless estopped from denying the PO?

(c) If the answer to either (a) or (b) above is “yes”, what, if any, is the outstanding amount under the contract or deemed contract as the case may be?  In particular, did the alleged variation works in fact constituted variations to the PO, and if so, what should be their reasonable values?

(d) Even if there is any outstanding amount under issue (c), is the defendant nevertheless entitled to rely upon the “pay-when-paid” clause in the PO to deny, wholly or partly, the plaintiff’s entitlement to such amount?

(e) Even if the answers to both issues (a) and (b) are “no”, is the plaintiff entitled to be paid by the defendant on a quantum meruit basis?  If so, what should be the amount? 

C. Test for assessing the credibility of a party’s case

17. In Lee Fu Wing v Yan Po Ting Paul [2009] 5 HKLRD 513, Deputy High Court Judge Thomas Au (as he then was) observed that in assessing the credibility of a party’s case, the court should take into consideration the following (at paragraph 53):-

“(1) Whether the party’s case is inherently plausible or implausible;

(2) Whether the party’s case is, in a material way, contradicted by other evidence (documentary or otherwise) which is undisputed or indisputable;

(3) Where it is shown that a witness has been discredited over one or more matters to which he has given evidence using the above tests. This is relevant to the assessment of his overall credibility;and

(4) The demeanour of the witness.”

18. This dicta was recently cited with approval by the Court of Appeal in Ageas Insurance Company (Asia) Ltd v Lam Hau Wah Inneo, CACV65/2014 (unreported, 9 January 2015) at paragraph 38 per Kwan JA.  See: Singh Harjit v Determination Business Ltd t/a Muse Studio, DCEC 1082/2011 (unreported, 27 February 2015) at paragraph 12 per Deputy District Judge Sanjay A Sakhrani. 

19. In my view, the contemporaneous documents provide the best guide as to what actually happened.  As the Court of Appeal observed in Esquire (Electronics) Ltd v Hong Kong & Shanghai Banking Corp Ltd [2007] 3 HKLRD 439, perStock JA (as he then was) at paragraph 158 at p 494, where there exists a wealth of contemporaneous documents, credibility is to be tested by reference most particularly to them.  This is particularly so in building and construction cases, as Kaplan J observed in Eu Asia Engineering Ltd v Wing Hong Contractors Ltd, HCCT 16/1990 (unreported, 23 December 1991) (at p 6):-

“In construction cases, as in most other cases, I attach great significance to the contemporaneous documents. These are usually prepared in good faith before a dispute has arisen or at any rate crystallized. It is a particularly devious contractor, employer or sub-contractor who systematically manufactures documents to assist in a future dispute. Fortunately, such instances are rare. I accept that once a dispute has been identified it is necessary to pay careful attention to the documents created after that time because it is only natural that parties will reflect their grievances and justification for action taken in those documents …”

D.  Issues (a) and (b): Whether the PO was signed with the authority of the defendant and constituted a binding contract between the plaintiff and the defendant, and whether the defendant is nevertheless estopped from denying the PO?

20. In my view, issues (a) and (b) should be considered together.  Subject to the answer to issue (d) set out in paragraph 16 above, the resolution of these issues will decide the question of liability.  The resolution of the conflict of evidence under these issues is principally a question of credibility of the witnesses. 

21. Before considering these issues, it is useful to be reminded of some basic propositions of agency law. 

22. The authority of the agent may be actual or apparent.  Where the agent’s authority results from a manifestation of assent that he should represent or act for the principal expressly or impliedly made by the principal to the agent himself, the authority is called actual authority, express or implied: Bowstead & Reynolds on Agency, 20^th ed, §§1-001. 

23. Where a person, by words or conduct, represents or permits it to be represented that another person has authority to act on his behalf, he is bound by the acts of that other person with respect to anyone dealing with him as an agent on the faith of such representation, to the same extent as if such other person had the authority that he was represented to have, even though he had no such actual authority.  This is called apparent authority: see Bowstead Article 72.  

24. In this case, we are concerned with apparent authority. 

25. The most important contemporaneous document in this case is, of course, the PO.  Two observations can be made about the PO.  The first is that it was stamped with the defendant’s company chop.  The second is that it was printed on the defendant’s letterhead with Mr Lai’s residential address stated thereon. 

26. Also of importance are the VO claims submitted by the plaintiff to the defendant, the corresponding VO claims submitted by the defendant to REC and the invoices/interim payment applications issued by the plaintiff to the defendant.  As noted in paragraph 10(g) above, the VO claims submitted by the defendant to REC are called “Quotations”, stamped with the defendant’s company chop and printed on the defendant’s letterhead with Mr Lai’s residential address stated thereon.

27. Adopting the approach set out in Section C above, I find the defendant’s case and Mr Lai’s evidence in relation to the main issue inherently incredible in light of undisputed or indisputable evidence:-

(a) As noted in paragraph 25 above, the PO was stamped with the defendant’s company chop.  Both the defence and Mr Lai’s witness statement are silent on this important issue.  It was only in his oral evidence that Mr Lai said that he was unable to recognise whether the rubber chop stamped on the PO was the defendant’s company chop.  I have no hesitation in rejecting his evidence as being evasive and incredible.  His evidence is also inconsistent with the concession of the defendant’s counsel that there is no dispute that the rubber chop stamped on the PO was the defendant’s company chop.

(b) The address stated on the PO is Mr Lai’s residential address.  Mr Lai’s witness statement is also silent on this issue.  My distinct impression is that Mr Lai tried to distance himself from this address because it was his residential address.  In fact, it was only in his oral evidence that he reluctantly admitted that the address was his residential address.  He is also evasive in paragraph 9 of his witness statement when he refers to the address without at the same time disclosing that it is in fact his residential address. 

(c) Mr Lai’s allegation in paragraph 17 of his witness statement that the letterhead of the PO was not “the usual letterhead used by [him] in connection with the defendant’s matters” is contradicted by the VO claims submitted by the defendant to REC, all of which used the same letterhead as the PO with Mr Lai’s residential address stated thereon.  In his witness statement, Mr Lai did not make any allegation that the VO claims submitted by the defendant to REC were not on the usual letterhead of the defendant.  It was only in his oral evidence that he made such an allegation.  I have no hesitation in rejecting Mr Lai’s evidence as something he made up as he went along.

(d) Mr Lai admitted that he had received the letter dated 5 September 2012 from REC which was sent to his residential address.  But it is also his allegation that he had not received the VO claims and invoices/payment applications from the plaintiff which were also sent to his residential address.  Mr Lai was unable to give any explanation as to why he received the former but not the latter when both were sent to his residential address.  I find his evidence contradictory in this regard and do not accept his testimony.  I find that he and the defendant did receive the VO claims submitted by the plaintiff which were sent to his residential address. 

(e) Mr Lai’s evidence in paragraph 5 of his witness statement that he was accompanied by Mr Kitto Tao (“Mr Tao”), whom he said was Ms Ma’s assistant, to a tender meeting held at REC’s office is contradicted by (i) the email dated 22 October 2012 from Mr Tao to Mr Cheung in which Mr Tao described that he was from the defendant and by which he enclosed the VO assessment of the Project from REC for Mr Cheung’s information; and (ii) the fax dated 13 December 2012 from Mr Tao to Mr Cheung in which Mr Tao described himself as the “project manager” of the defendant and by which he asked the plaintiff to take action regarding some outstanding defect works for the Project.  In my view, these two documents also contradict the defendant’s case that there was no sub-contract between the plaintiff and the defendant.

(f) On Mr Lai’s own evidence, the sub-contract between the defendant and Full Harvest was made orally between him and Ms Ma in a face-to-face meeting in early 2011.  I find it inherently improbable that a contract of this kind, ie, a sub-contract for electrical system and fire service system installation works, would be concluded orally.

(g) On Mr Lai’s own evidence, there was no written correspondence between the defendant and Full Harvest at all during the whole course of the Project.  I find it inherently improbable that there is nothing in writing or on record between the defendant and Full harvest if indeed there was a sub-contract between them.

(h) Mr Cheung gave evidence that the plaintiff attended the site, carried out the works for the Project and completed the works.  In cross-examination, it was not put to Mr Cheung that it was Full Harvest who carried out the works for the Project and completed the works.

28. On the other hand, I find Mr Cheung’s evidence consistent with the probabilities and generally with the contemporaneous documents.  I accept his evidence in full. 

29. I therefore find as facts that the PO was stamped with the defendant’s company chop and on the usual letterhead of the defendant with Mr Lai’s residential address stated thereon, that the plaintiff carried out the works pursuant to the PO, that the plaintiff submitted VO claims to the defendant for variation and/or additional works which it had carried out and that the defendant submitted corresponding VO claims to REC and that in signing the PO, Mr Ng must have the permission of Mr Lai and the defendant to use the defendant’s company chop and letterhead. 

30. It follows from the above that I reject the defendant’s case and Mr Lai’s evidence that the defendant had sub-contracted the works under the Agreement to Full Harvest.  Save as to the undisputed facts set out respectively in paragraph 14(a), 14(d) and 14(g) above, ie, the date of incorporation and the business carried on by the defendant, the acceptance of the defendant’s tender by REC and the signing of the Agreement, and Mr Ng was not an employee of the defendant, I reject the whole of Mr Lai’s evidence set out in paragraph 14 above as being incredible.  Furthermore, generally, where Mr Lai’s evidence conflicts with that of Mr Cheung, I prefer Mr Cheung’s.

31. Much reliance was placed by the defendant on the official receipt dated 31 March 2012issued by Full Harvest to the defendant whereby Full Harvest acknowledged receipt of the total sum of $2,617,973.20 from the defendant between 11 April 2011 and 23 August 2011.  In my view, the receipt is not evidence of the existence of any subcontract between the defendant and Full Harvest.  At best, it is evidence of some kind of payment arrangement between the defendant and Full Harvest. 

32. Mr Lau, counsel for the defendant, submits, nevertheless, that there was no binding contract between the plaintiff and the defendant because there is no evidence that the defendant had made any representation to the plaintiff that Mr Ng had the authority to enter into the PO and that any representation came from Mr Ng himself.  He draws the court’s attention to Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 where Diplock LJ (as he then was) said (at pp 505 to 506):-

“If the foregoing analysis of the relevant law is correct, it can be summarised by stating four conditions which must be fulfilled to entitle a contractor to enforce against a company a contract entered into on behalf of the company by an agent who had no actual authority to do so. It must be shown:

(1) that a representation that the agent had authority to enter on behalf of the company into a contract of the kind sought to be enforced was made to the contractor;

(2) that such representation was made by a person or persons who had ‘actual’ authority to manage the business of the company either generally or in respect of those matters to which the contract relates;

(3) that he (the contractor) was induced by such representation to enter into the contract, that is, that he in fact relied upon it; and

(4) that under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind sought to be enforced or to delegate authority to enter into a contract of that kind to the agent.”

33. Mr Lau also draws the court’s attention to Thanakharn Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (2010) 13 HKCFAR 479 where Lord Neuberger of Abbotsbury NPJ observed (at paragraphs 70 and 71) that:-

“70. … I find it very hard indeed to conceive of any circumstances in which an alleged agent, who does not have actual or apparent authority to bind the principal, can nevertheless acquire apparent authority to do so, simply by representing to the third party that he has such authority.

71. It is worth adding that, as was explained in the two cases just referred to, before any representation by the agent could be relied on to assist the contention that he had apparent authority, the court would have to be satisfied that the principal had given the alleged agent apparent authority to made the representation in question.  Furthermore, any such representation would have to be ‘clear and unequivocal’, as in any case of estoppel by representation …, and what is clear and unequivocal must be judged by reference to the practical realities of the particular case…  Otherwise, apparent authority could not be established on the back of the statement as a matter of principle.”

34. It should, however, be noted that in Freeman & Lockyer itself, Diplock LJ also observed (at pp 503 to 504) that:-

“The representation which creates ‘apparent’ authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal’s business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal’s business had usually ‘actual’ authority to enter into”. [Emphasis added]

35. In relation to this issue, it is also stated in Bowstead at paragraph 8-020 that:-

“…It is usually said that a representation by the agent himself that he has authority cannot create apparent authority in him, unless the principal can be regarded as having in some way instigated or permitted it, or put the agent in a position where he appears to be authorised to make it”. [Emphasis added]

36. In this case, I have found (see paragraph 29 above) that the PO was stamped with the defendant’s company chop.

37. In Swire Engineering (1988) Ltd v T S  Wong Company Ltd, CACV 94/1992 (unreported, 14 October 1992), in finding that a quotation stamped with a company’s chop was binding on the company, the Court of Appeal said (at p 8per Nazareth JA (as he then was)):-

“The quotation was not only signed by [the agent] but stamped with a stamp which, while not the defendant’s seal, was the defendant’s chop for the particular subcontract site: All this, in our judgment, is conduct that constitutes a representation by the company that [the agent] had authority to bind it in the matter”.

Although the agent in that case is a building service engineer of the defendant, I do not see any real distinction between an agent who is an employee of the principal and one who is not, the focus of the Court of Appeal being on whether there was a representation by conduct on the part of the principal that the agent had authority to bind it in the matter.

38. Furthermore, regarding the use of a rubber chop of a company in Hong Kong, Lo and Qu’s Law of Companies in Hong Kong (2013 ed) states (at paragraph 12.053) that:-

“Rubber chop does not have legal significance under Ordinance but could be relevant to apparent authority. It is common for Hong Kong companies to have a rubber chop which is used as the company’s chop and is stamped on company documents. The chop is not equivalent to the common seal and does not have any legal significance under the Companies Ordinance. The chop is, as a matter of custom, used to show that the person signing a document has authority to sign on behalf of the company, and so where a company allows a person to use the company chop, the stamping of the chop could be relevant to matters relating to the apparent authority of the person. In England, there is a suggestion in some cases that the imprinting of a rubber-stamped name of the company by a duty authorised person can be regarded as a signature of the company (although not with the same effect of a common seal); however, doubts have also been expressed whether this view is correct.” [Emphasis provided]

39. I have also found (see paragraph 29 above) that in signing the PO, Mr Ng must have the permission of Mr Lai and the defendant to use its company chop and letterhead.  In my judgment, the defendant’s permission for Mr Ng to use the defendant’s company chop and letterhead constituted a representation to the plaintiff that Mr Ng had the authority to act for the defendant in situations where the use of the defendant’s company chop would suffice, including the entering into of the PO. 

40. My finding in paragraph 39 above is supported by the following contemporaneous documents: the VO claims submitted by the plaintiff to the defendant and the corresponding VO claims submitted by the defendant to REC.  I find that there was a tripartite relationship between REC, the defendant and the plaintiff, with REC as the main contractor, the defendant as REC’s sub-contractor and the plaintiff as the defendant’s sub-contractor. 

41. Mr Lau also submits that the plaintiff’s reliance on Mr Ng’s apparent authority was irrational.  He draws the court’s attention to Thanakham Kasikorn Thai Chamkat (Mahachon) v Akai Holdings Ltd (No 2) (supra)where Lord Neuberger of Abbotsbury NPJ observed (at paragraph 62) that:-

“I conclude that it is open to the [third party] to rely on [the agent’s] apparent authority (if he had such authority) unless the [third party]’s belief in that connection was dishonest or irrational (which includes turning a blind eye and being reckless).”

42. I reject Mr Lau’s submission. Leaving aside the point that this is not even an issue in the list of issues prepared by the defendant, I find that there is nothing irrational for the plaintiff to rely on Mr Ng’s apparent authority when he must have been permitted by Mr Lai and the defendant to use the defendant’s company chop and the defendant’s letterhead on the PO (as I have found). 

43. In all these circumstances, I will answer “yes” to the questions set out in the heading to this section, ie, the PO was signed with the authority of the defendant and constituted a binding contract between the plaintiff and the defendant, and the defendant is also estopped from denying the PO.

E. Issues (c) and (e): What, if any, is the outstanding amount under the contract or deemed contract as the case may be?  In particular, did the alleged variation works in fact constituted variations to the PO, and if so, what should be their reasonable values? Is the plaintiff entitled to be paid by the defendant on a quantum meruit basis?  If so, what should be the amount? 

44. In my view, issues (c) and (e) should be considered together.  Subject to the answer to issue (d) set out in paragraph 16 above, the resolution of these issues will decide the question of quantum.

45. In Choy Bing Wing v Hong Kong & Shanghai Hotels Ltd [1995] 2 HKC 435, the Court of Appeal held that, in the case of work done by the plaintiff at the defendant’s request after termination of the contract, the plaintiff was “clearly entitled to be paid whatever may be found to be reasonable remuneration for that work”: per Godfrey JA (as he then was) at 439E to F.

46. It is also stated in Chitty on Contracts, 31^st ed, Vol. II, at paragraph 37-173 that:-

“The courts have laid down no rigid guidelines to be applied in the assessment of a reasonable sum although it is clear that the contractor should be paid a fair commercial rate for the work done in all the relevant circumstances…”

47. In this case, I have found that the plaintiff submitted VO claims to the defendant and that the defendant also submitted corresponding VO claims to REC.  I find that the value as assessed by REC, ie, $214,143.04, to be a reasonable and fair sum for the VO claims.  I also accept the evidence of Mr Cheung that in or about September 2012, Mr Ng on behalf of the defendant verbally agreed that the plaintiff should be entitled to the values of the VO claims as assessed by REC and agreed by the defendant less 10% for the defendant’s management fee.  Therefore, I assess the quantum of the plaintiff’s claim at $439,228.74, calculated as follows:-

	$
Original contract sum	646,500.00
90% of the value of VO claims assessed by REC (90% x $214,143.04)	192,728.74
Less part payment received	(400,000.00)
	439,228.74

F. Issue (d): Even if there is any outstanding amount under issue (c), is the defendant nevertheless entitled to rely upon the “pay-when-paid” clause in the PO to deny, wholly or partly, the plaintiff’s entitlement to such amount?

48. The PO contained the following express term:-

“Pay when paid payment with 14 days credit”.

49. In relation to this term, there are the following issues:-

(a) What does the term mean?

(b) Is the defendant entitled to rely on this term?

50. Chitty on Contracts - Hong Kong Specific Contracts, 4^th ed, summarises the effect of a pay-when-paid clause as follows (at paragraph 8-174):-

“The effect of such clauses is that the subcontractor will have no right of payment from the main contractor until the main contractor receives payment of the relevant sum from the employer. Payment to the subcontractor will then be required within a specified period thereafter. The commercial purpose of such provisions is that in the event of an owner becoming insolvent, the subcontractor will effectively be sharing a proportion of the loss suffered by the main contractor and that deductions caused by delayed completion, or other defaults, have their effect on subcontractors as well as main contractors.” [Emphasis added]

51. In the present case, as the PO contained the express term set out in paragraph 48 above, it would appear that the principles stated in paragraph 8-174 of Chitty on Contracts - Hong Kong Specific Contracts, 4^th ed., apply.  However, the questions are: what is meant by the term “relevant sum”, whether in the present case the defendant has received the relevant sum from REC and if not, the reasons therefor.

52. As already noted in paragraph 15 above, REC had by letter dated 15 August 2013 certified that the final sub-contract sum of $1,875,535.04 (inclusive of a sum of $214,143.04 for the VO claims) was due and payable by REC to the defendant.  In paragraph 13 of his witness statement, Mr Lai alleged that the defendant had only received the total sum of $1,288,665 from REC for the Project.  I have no hesitation in rejecting Mr Lai’s allegation as being incredible.  This amount is considerably less than the final sub-contract sum certified by REC to be due and payable to the defendant, ie $1,875,535.04.  In my view, there is simply no reason why the defendant would refuse to accept the figure of $1,875,535.04 as the amount due and payable by REC to the defendant.  In the circumstances, I find that the defendant must have agreed with REC that the final sub-contract sum due and payable by REC to the defendant was $1,875,535.04 (inclusive of a sum of $214,143.04 for the VO claims). 

53. I also reject the allegation in paragraph 6(c) of the defence filed on 14 September 2012 that as of the date of the defence the defendant has not received any payments from REC in relation to the VO claims.  I note that this allegation is not repeated in Mr Lai’s evidence. 

54. On the other hand, I accept Mr Cheung’s evidence summarised in paragraph 10(j) above, which was not challenged by the defendant in cross-examination.  In my view, by reason of such evidence, the defendant had received the relevant sum from REC and cannot rely on the “pay-when-paid” clause to avoid payment to the plaintiff. 

55. I also accept the submission of Ms Wong, counsel for the plaintiff, that a contractor cannot rely on a “pay-when-paid” clause if the reason for non-payment is its own breach of contract or default: Durabella Ltd v J Jarvis & Sons Ltd 83 ConLR 145 at paragraph 17 perHis Honour Judge Humphrey Lloyd QC.  I find that any refusal or failure on the part of REC to pay the VO claims to the defendant was either the result of the defendant’s breach of contract or default or had nothing to do with the plaintiff and for which the plaintiff ought not to be held liable. 

G.  Conclusion

56. For the above reasons, the plaintiff succeeds in its claim against the defendant, albeit in a lesser amount.  I make an order that there be judgment against the defendant in favour of the plaintiff for the sum of $439,228.74 with interest from the date of the writ until payment at judgment rate. 

57. I further make a costs order nisi that costs of the action be to the plaintiff to be taxed if not agreed with certificate of counsel.  Unless any of the parties applies by summons to vary the same, the costs order nisi shall be made absolute within 14 days from today. 

58. Last but not least, I thank counsel for their assistance in this matter. 

Annex 1

VO Claims submitted by the Plaintiff to the Defendant

Annex 2

VO Claims submitted by the Defendant to REC